ARB’s Profit Margins Are Normalising

We maintain our AUD 24.50 fair value estimate for shares in ARB ARB following the release of interim fiscal 2023 earnings that were virtually prereleased (see our note published Feb. 6, 2023: “Lower New Vehicle Volumes Continue to Weigh on ARB’s Earnings”). With sales down 5% and a sharply higher cost base, first-half NPAT fell 31% on the prior corresponding period, or pcp, to AUD 47 million. We make no changes to our full-year NPAT forecast of AUD 98 million, and at current prices, shares in ARB screen as overvalued.

ARB declared a fully franked interim dividend of AUD 32 cents per share, representing a payout ratio of about 55% of EPS. We continue to forecast total fiscal 2023 dividends of AUD 71 cents per share—in line with fiscal 2022 despite lower earnings. Longer term, we expect ARB to continue to pay out about half its EPS as dividends. This is supported by ARB’s pristine balance sheet. At Dec. 31, 2022, the company had no debt and a net cash position of AUD 30 million.

Australian aftermarket sales (57% of group sales) lifted 3% compared with the pcp and was the only channel to grow during the half. This growth was achieved despite the challenging environment, cycling pandemic-induced sales growth, subdued new vehicle sales, and rising cost of living pressures. Our narrow economic moat for ARB is underpinned by the strong brand position it has carved out in the Australian aftermarket.

By contrast, export sales fell by 9% and original equipment manufacturer, or OEM, sales fell 37%. We do not expect the international business enjoys the same competitive advantages as in Australia. While ARB has established significant brand equity in Australia, the firm has been unable to enjoy this pricing premium offshore. New car sales also remain depressed amid semiconductor shortages, weighing on the OEM business. We forecast Australian new vehicle sales volumes remaining subdued through calendar 2023 before picking up again from calendar 2024.